Installed Base: A Solid Moat For Technology-Driven Businesses

Summary

• When it comes to the economic moat, the installed base is relatively a new concept compared with brands, scale advantage, and the network effect.
• The installed base moat is most popular among technology-driven businesses.
• We provide three picks to demonstrate the sustainable competitive advantages achieved through the installed base.

Written by Steven Chen, MBA.

Source: wikipedia.org.

Overview

The installed base is probably the most commonly leveraged moat among technology-driven companies. Without doubt, the technology field is full of disruptions and revolutions. As a result, it is difficult for businesses to endure their competitive advantages, and hence, for investors to find long-term winning bets. Nonetheless, the strategy of growing and focusing on install base has helped many companies to deliver consistently high returns for their owners. The reasons behind are not so complicated to understand.

First of all, the increasing complexity of technologies has led to high switching costs from one option to another. As long as the installed product works just fine, it would not be appealing for the client to spend time and capital on platform migration as well as staff training or to risk its mission-critical operations. This could be the case even when a lower-cost or higher-quality solution emerges.

Furthermore, the installed base typically generates recurring revenue, which is often high-margin, cash-rich, and predictable. The subscription/membership model has its popularity among many technology providers, while after-market sales are also widely seen. Reliable, repeatable, and scalable cash streams enhance the long-term visibility of business prospects, protecting the downside for shareholders, and enabling better strategic planning of the management.

From a quantitative perspective, companies benefiting from the "installed base moat" are likely to deliver superior returns on capital and free cash flow margins consistently.

Below, we would like to exemplify the sustainable competitive advantage of the installed base through three of our favorite picks.

Waters (WAT)

Source: thedrum.com.

Massachusetts-based Waters is the world's leading specialty measurement company focused on improving human health and well-being through the application of its focused portfolio of high-value analytical technologies.

The growing installed base acts as the sustainable competitive edge for the Waters, thanks

Analyst’s Disclosure:I am/we are long FDS, ISRG, WAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Mentioning of any stock in the article does not constitute investment recommendations. Investors should always conduct careful analysis themselves and/or consult with their investment advisors before acting in the stock market.